DAPL on shaky financial ground

CNBC is reporting that “Donald Trump has sold his entire stake in Energy Transfer Partners, the company overseeing construction of the controversial Dakota Access Pipeline.”

Trump’s shares of the company created a possible conflict of interest for the president-elect, as his administration may determine the project’s fate amid ongoing protests from Native Americans and climate activists. Trump has supported the 1,172-mile pipeline and broader efforts to produce more fossil fuels in the United States.

It’s unknown when the transaction occurred.

Energy Transfer Partners (ETP) the company that is responsible for construction the Dakota Access Pipeline has been on shaky financial ground since Moody’s put the company’s investment grade rating on negative watch last June. The company was taken off the watch list for a few months. Then on November 21, Sunoco Logistics Partners (SXL) announced a merger with ETP, a move that didn’t sit well with shareholders on either side. ETP shareholders didn’t appreciate the deal price of $39.2 per unit down from a high of $43.5. And SXL shareholders objected to the addition of a highly-leveraged, sluggish (MLP) partnership to their portfolio. To further add to shareholders’ woes, after the merger announcement Moody’s reinstated their negative watch on ETP.

… The delay has come with a cost [to ETP]. While no authoritative figures have been provided, unsubstantiated reports indicate the delay has caused DAPL to suffer $450 million in losses. The costs include labor and equipment downtime, mobilization / demobilization charges, onsite equipment damage / vandalism, incremental security measures, litigation, and asset loss-of-use. Not included are Bakken-producer economic losses …

… Energy Transfer seems to move from one deal, crisis, or conflict to another. It makes it difficult to evaluate the core business or determine solid Fair Value Estimates … Most MLP investors seek consistent income, steady growth, and good management. Energy Transfer has been unable to provide these characteristics to all MLP units consistently …

Since 2014, when the DAPL was first proposed the Bakken has seen a 20% decline in oil production. Oil prices remain stuck at an all-time low which only perpetuates the slow-motion collapse in that region. The economic reality of the depressed oil market calls into question the need for the DAPL, putting the future of the project at serious risk for investors.

Operators in the Bakken signed contracts to pump oil through the Dakota Access Pipeline two years ago when oil was $100 a barrel. Many of those contracts will expire on January 1, 2017. Clark Williams-Derry, author of the recent report The Rickety Finances Behind the Dakota Access Pipeline, told Amy Goodman today in an interview at Democracy Now!:

The lawyers for the Dakota Access company have said that they have a — that their committed shippers have the right to terminate their contracts if the company doesn’t meet its January 1st deadline. We don’t know. We’ve actually heard a few things suggesting that, oh, it’s just an informal deadline, but they’ve argued very clearly to the courts that it’s not informal, that this is an actual contractual deadline. If some of the shippers were to pull out of the Dakota Access pipeline at that point, well, you could see — it could start to create a financial disaster for the company. The company really depends on those contracts. You can actually imagine that some of the oil shippers might be thinking, well, you know, with production down, with prices down, maybe this would be a great time to pull back from our commitments to the pipeline. And, in fact, I think the investors in those companies should be encouraging the oil shippers to pull back, to take a second look and to think about whether it makes sense for the long run. In a region where oil production is falling, you don’t want to make a seven-to-10-year commitment to keep shipping oil through the pipeline. You’re just going to wind up wasting money.

But it’s not just the DAPL that’s in trouble. Today Inside Climate News published a list of 28 pipeline projects that have been canceled, rejected, or delayed since the Keystone pipeline was canceled by the Obama Administration in November 2015.

The good news is the article credits “people power on the ground” for these successes.

As Tom Sanzillo, director of finance for the Institute for Energy Economics and Financial Analysis (IEEFA), points out: “[T]here should be a concern that the utilities are building too many pipelines and the [regulators] should be concerned about how consumers pay for it.”

Likewise, no matter what market watchers are saying, investors ought to heed the smoke signals emitting from Standing Rock as a warning that investment in pipelines is risky business for the foreseeable future.

Investors would be wise to follow the lead of self-described “smart businessman” Donald Trump, along with DNB (Norway’s largest bank) and Odin Fund Management (one of Norway’s leading fund managers) and divest themselves of their stocks and/or assets in DAPL and other pipeline ventures.